Today's comment is by Jack Crooks, editor of The Money Trader and World Currency Options.

The big news this past week was definitely the dollar. The dollar rallied the most against the euro than it has in the past eight years. The dollar index climbed the highest it has been in six months.

So the question is: What's going on here? How can the dollar rally like this when the greenback's fundamentals leave so much to be desired?

Let me give you my theory about what's happening here. To really understand it, you need to start with a question:

What happened to decoupling, the idea that other economies are immune to the United States' weakness?

Need Evidence? It's All on the Nightly News

It's pretty easy to see other countries are feeling our same sub-prime pain. Just look at these recent news stories...

• German industrial orders dropped sharply - by 2.9% in June. That's disconcerting considering Germany's economy makes up one-third of total Eurozone output. And speaking of the rest of the Eurozone, many of those economies are bogged down by housing busts just like us.

• The International Monetary Fund (IMF) called out the U.K. economy. They predicted the U.K. would grow 1.8% and 1.7% for 2008 and 2009, respectively. All I have to say is: Kiss those numbers goodbye. The IMF's latest forecast calls for a seriously lower 1.4% in 2008 and 1.1% in 2009.

• Australia is battling sluggish household spending and their financial sector is being challenged. The National Bank of Australia recently reported a huge second quarter write-down, which they blamed on massive collateralized debt obligations (CDOs).

• And the New Zealand Treasury anticipates a second consecutive quarter of negative GDP growth. By definition, New Zealand will have entered recession once official numbers are released. They'd be the second OECD-member country since Denmark to sink to official recessionary status.

How Does this Big 3 Recession Affect the Next "Superpower?"

As we were so often told when analysts were pushing the decoupling theory, China is set to take over the world.

But if weakness is spreading around the globe, what does that mean for China?

The 2008 Summer Olympics are just now beginning, and there's news that pollution has grown to far worse levels over the last few months. Chinese officials are putting all kinds of limits on how many cars can be on the road on any given day.

Additionally, in an effort to minimize excessive air pollution, Beijing is closing 105 factories. And should conditions worsen, neighboring cities could close as many as 117 factories combined.

Anticipation of the games gave Chinese companies reason to ramp up production. But what's concerning is these companies front-loaded production and an inventory glut is building up.

It makes you wonder how much extra production was jammed into the last quarter in order to prepare for air cleansing before the great games began.

I suspect plenty.

That's never good because they will have to sacrifice growth for as long as it takes to work through the oversupply.

The Commodity and Currency Circle

If the global economy is slowing, and China is forced to work through excess inventory, demand for commodities will be impacted. I'm guessing crude oil prices, in particular, will suffer from the realities I just described.

And remember, commodity prices and currencies influence each other in a self-feeding circle.

For example, falling crude prices could be the one thing that allows U.K. and European central banks to begin lowering their interest rates.

If and when that happens, the dollar will become more attractive relative to those currencies.

It wouldn't take a bold move on the part of the U.S. Federal Reserve, either (nor do I expect one).

A narrowing interest rate disadvantage between the dollar and euro - or the dollar and the pound - would be hugely supportive for the greenback.

In fact, this may very well be why the dollar HAS ALREADY been holding up given such incredibly dismal news day after day from the U.S. economy.

Take a look at this chart ...

Over the last year or so almost everyone's been pointing to the inverse relationship between the U.S. dollar and crude oil.

At the very left of the red rectangle on my chart, you can see where the tight inverse correlation began to break down. That's when the dollar bounced higher from its all-time low. Crude soared well beyond its record high at the same time.

Crude rallying and the dollar drifting slowly higher simultaneously? That was certainly no inverse correlation.

But from the furthest right point of that red box is where the tight inverse correlation has resumed. Only this time, the direction is in favor of the dollar. And it comes exactly after a new all-time high for crude prices.

Translation: The buck could be back.

The dollar has been able to continue its rally this week, even amidst a blitzkrieg of central bank announcements. While it has a long way to go - and recovery may not be swift - I think it's time to keep the dollar rally scenarios in clear sight. Especially now that other economies are catching the bug.

JACK CROOKS, Editor of The Money Trader and World Currency Options

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Credit Market Says: Don't Buy Stocks Yet! Part I

Since July 15 when U.S. markets hit another intermittent low amid the ongoing credit crisis, the Dow Jones Industrials Average (Dow) has gained 7.2%.

But over the same period the most important credit indices have posted declines while others have logged marginal gains. Overall, the broad trend in credit has not been bullish since mid-July. This tells me that stocks are luring more investors into another bear market trap.

Since the onset of the credit squeeze last August, stocks have staged two bear market rallies - the first last September and another one in late March. Both rallies ended badly for investors.

The last bear market rally following the Bear Stearns Cos. bailout was actually supported by a broad-based decline in riskier credits. But that 10% gain for stocks from late March through late May also proved dangerous. In June, the S&P 500 Index plunged more than 8%. In fact, that was the worst June for the S&P 500 since 1930.

Nevertheless, it's important to gauge what credit indicators are telling us now so we can at least feel more confident dipping our toes back into the stock market.

Lending rates, as defined by LIBOR, which sets the standard for over US$1.5 trillion worth of global funding remains elevated. It's still 80 basis points above the Federal Funds target rate.

The same is true in Europe where EURIBOR sits at 4.96%. That's significantly above the European Central Bank's (ECB's) base rate of 4.25%.

These lending rates have not eased since June and continue to paint a bad picture for global cross-border lending or the lack of inter-bank liquidity. Central banks, despite pumping the credit markets with hundreds of billions of dollars or euro since last summer, still can't ease LIBOR or EURIBOR.

LIBOR remains my greatest concern followed by mortgage rates.

Tune in tomorrow and I'll show you exactly how the credit markets reacted to this past week's stock market rally.

This May Be the Easiest, Cheapest Way to Make Long-Distance Calls...But Does It Really Protect Your Privacy?

I've liked Skype for years. In case you're not familiar with it, Skype is a low-cost voice over Internet (VOIP) telephone provider. And it's extremely useful for many reasons.

First, it's very easy to install and use. Secondly, you can make free calls to other Skype users, anywhere in the world. But most importantly, Skype automatically encrypts calls to other Skype users, and protects your conversations from being monitored.

However, I've long been skeptical about the encryption method Skype uses. I was skeptical because Skype refuses to publish the source code it uses for encrypting phone calls. In other words, they won't let experts inspect it for possible flaws or "backdoors."

Apparently, my concerns were warranted. European news sources report that an Austrian government official recently disclosed that monitoring conversations over Skype presented "no particular problems." And Skype (now owned by eBay) refuses to comment on the allegations.

It's not clear how eavesdropping occurs, although there's speculation that Skype's global service outage last summer wasn't due to "Windows update" issues, as previously reported. Instead, it was allegedly part of a secret plan orchestrated by the U.S. National Security Agency to install software that would allow law enforcement personnel to decipher Skype conversations.

I'm not surprised by this development. I've repeatedly warned that Skype may be secure against casual eavesdropping, but that it's not safe from "official" monitoring. The report from Austria only confirms this conclusion.

If you really want privacy for your Internet telephone calls, check out Zfone (http://zfoneproject.com). Like Skype, Zfone lets you make encrypted phone calls over the Internet. But unlike Skype, its open-source design allows experts to examine the software for back doors or other flaws.

Zfone's principal designer is Phil Zimmermann, the creator of PGP, the most widely used email encryption software in the world. It's not as easy to use as Skype, but if telephone privacy is important to you, I recommend that you check it out.

MARK NESTMANN,
Privacy Expert & President of The Nestmann Group
www.nestmann.com

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